Donna Karan says she was following her heart, not her head, when she agreed last month to sell out to Bernard Arnault's flamboyantly acquisitive Louis Vuitton Moët Hennessy luxury goods empire for a cool $450 million personal profit. Who would have thought the famous American fashion designer had such a head for business?

The deal sent pulses racing on Wall Street. But disappointed investors in her publicly traded company, Donna Karan International Inc, will have to split what they say is a measly $195m between them - if this second part of the LVMH takeover gets the green light from her board.

Karan and her husband Stephan Weiss have already sold Arnault the most valuable part of their fashion empire: the privately held Gabrielle Studio, which owns and licenses all the Donna Karan trademarks, from the upscale Donna Karan New York to the more mid-market DKNY labels. This personal royalty arrangement, while proof of the fashion designer's shrewd business acumen, has long caused disquiet on Wall Street, sucking most of the profit out of the public company while paying Karan and Weiss some $80m from 1996 to 1999.

So it's not too much of a surprise that some shareholders are getting litigious.

In a Delaware court, DKI shareholder Janet Allred has accused both Karan and Weiss of 'preferring their own interest to realise the maximum value on the sale of the trademarks', alleging that their private deal with LVMH had 'effectively thwarted' the company from being shopped around to other buyers to 'maximise shareholder value'. The plaintiff contends the $195m offer for the Wall Street quoted company, at $8.50 a share, is 'unfair' and 'inadequate', adding that some analysts and portfolio managers believe the company is worth between $14 and $15 a share.

Karan went public at $24 in 1996, and the stock had fallen as low as $4 before she and Arnault announced the deal on 18 December. The price tag for LVMH is also less than a third of the company's annual revenue of $662m, and a significantly smaller multiple than European luxury fashion houses such as Fendi were getting last year. Despite the 74 per cent premium to the company's 15 December closing price, most shareholders will lose out.

But since Karan and her Ducati motorcycle-riding husband own 22 per cent of the public company, they stand to pocket another $50m, bringing their total personal windfall to $500m.

'It's the best of all possible worlds for Donna Karan: she gets all that cash, and gets to continue what she does best - designing clothes,' says Harvey Robinson, an apparel analyst with Chapman Company, a Baltimore-based investment bank.

Karan would remain chief designer of a combined Gabrielle and DKI under the LVMH roof, and probably continue to profit as an investor - particularly as LVMH would be able to extract more value from the franchise by ending her controversial royalty arrangement. Karan is the only designer of a publicly traded design firm to retain ownership of her name and receive royalties based on net sales - DKI Inc pays Gabrielle 1.75 per cent of the first $250m, rising to 3.5 per cent of net sales over $1.5 billion. In 1999, DKI paid Karan $25m in a year it made just $10m in profit.

'Donna Karan will no longer be able to skim from the top,' says veteran Wall Street apparel analyst Walter Loeb, 'and that's good news for LVMH, but it comes a little late for DKI investors.'

Marc Ravitz, vice-president of Grace & White, which in September owned 109,700 DKI shares, agrees. 'The value of the Donna Karan enterprise is far greater than what LVMH is paying,' he told the Wall Street Journal, adding that the LVMH cash bid at $8.50 represents 25 per cent of the Donna Karan total revenue.

Richard Barone, chief executive of Maxus Investment Group, said there was 'more money offered on the Gabrielle Studios side and there should have been more on the public company side', adding that he would have been happy with $11 or $12. 'The public company is not worth anything without the other side; the real value is the two together, and Donna Karan holds all the cards.'

So it was amid this investor grumbling - and the possibility of the Allred case expanding to a class action lawsuit - that the DKI Inc board, which last month hired investment banker Merrill Lynch, announced on Monday that it would entertain offers from rival bidders or the possibility of remaining independent.

Some immediately speculated the move would spark a bidding war, bringing in LVMH's bitter business rivals, the Italian fashion house Gucci or the French retail giant Pinault-Printemps-Redoute (PPR). Gucci and LVMH are still locked in legal combat over LVMH's failed bid in 1999. Most market watchers now believe it unlikely that the public company will attract any higher offers, with its most valuable assets already in the hands of LVMH.

Other analysts cited concerns that the Donna Karan brand, more fashion than luxury oriented, could be hurt by the economic slowdown in the US.

'The DK International statement is not a surprise and there's nothing in it that precludes us moving forward with the deal. It's a standard, run-of-the-mill statement consistent with the board's fiduciary duties to protect shareholder interests,' an LVMH spokesman said, adding that the litigation is 'without merit'.

Karan is staying silent. But on the day of the deal, she said it was 'the right thing at the right time... I don't do deals with my head only. I did this deal with my heart.'

She added: 'As the world's leading luxury group, LVMH has the expertise, resources, global scale and vision to help me realise the full potential of Donna Karan and DKNY as worldwide luxury lifestyle brands. I have always admired Bernard Arnault and the environment he has created for designers in supporting their creativity, emphasising their individuality, respecting their brands and providing the resources to develop global luxury businesses.'

Perhaps she hasn't spoken lately to Alexander McQueen. LVMH's Arnault apparently drove the controversial McQueen to creative distraction - and into the arms of Gucci, which will now hold the controlling interest in a separate McQueen label.

But Donna Karan is no McQueen. Karan is no doubt more to the elegantly commercial tastes of the French luxury impresario, but then again, some analysts wonder whether she still has the sort of exclusive cachet LVMH normally seeks - her wide array of lines and products are too readily available in mid-price department stores.